A Second Look at Trump’s Halt to Lowering Premiums

OK, listen. I know that politics by itself is a nasty topic right now. And nevermind that I’m about to propose an opposing opinion to the National Association of Realtors. But, as a real estate professional and an economist, and always a student of causality, I want to weigh in on this.

Any article or media post that you are reading, with homeowners saying “In the first 24 hours Trump was in office, he already cost me $400 this year,” is just a false statement. And I get SO ANGRY when people, namely the mainstream media, put out sound bites or opinions and call it news. So, here’s what ACTUALLY happened, folks.

First of all, let’s review what an FHA mortgage is — FHA is the Federal Housing Administration, which was created to insure mortgages and collect fees from borrowers to reimburse lenders in case of a default. They are attractive to borrowers, particularly from a credit-worthiness standpoint, because they are easier to qualify for and require a down payment as little as 3.5% of the purchase price, plus closing costs and a monthly MIP (mortgage insurance premium).

From 2006 to 2009, there was not enough in the FHA reserve to bail out all the banks staggering under defaulted loans. In response to that, the US Treasury just printed money like there was no tomorrow ($1.7 BILLION, to be exact) to keep the FHA funded, and therefore the banks didn’t learn their lesson — see my previous write-up on The Big Short. After this debacle, FHA premiums rose significantly — in 2013, FHA borrowers paid 1.75% as an up-front fee at closing, and an additional 1.30-1.35% of their total purchase price over 12 months as mortgage insurance premium (MIP) in addition to their monthly mortgage payment. The purpose of these payments is for the FHA to replenish it’s cash reserves since the crash completely wiped it out — just to keep the banks with terrible underwriting guidelines and more concern for profit than potential risk afloat, which in the end, wasn’t at risk at ALL (again, see my Big Short article!), but I digress.

So. On Jan 10 — just ten days before leaving office, the Obama administration, in what some have called a political move to boost public opinion and ratings on the way out — made an announcement that effective Jan 27, they would maintain the 1.75% premium cost at closing, but would cut the MIP, currently at 0.85% of the purchase price, down to 0.60%, saving NEW homeowners closing after Jan 27 an average of $400 a year. It does NOT “cost” current homeowners/borrowers anything, since nothing changed for them after Trump halted the lowering of this premium — perhaps a lost DISCOUNT, but no added costs for borrowers.

So why did the Trump administration suspend this discount to new borrowers? As I drafted this article, the only official statement is: “FHA is committed to ensuring its mortgage insurance programs remain viable and effective in the long term for all parties involved, especially our taxpayers,” and the new HUD Secretary, Ben Carson, added he would “work with the FHA administrator and other financial experts to really examine that policy.”

I think putting more thought behind this, instead of just enacting more “feel good legislation,” is prudent, especially where — and this is my “well informed” opinion for sure — all signs are pointing to a correction in the marketplace, yet again. We’re seeing it here in the tremendous uptick in our short sale firm, where we are now getting 4-5 new incoming cases a week, an uptick from our usual pace of 1-3 new cases per week, mostly due to job loss or reduction in income. Income and employment have not seen increases in line with the increases in the price of housing, which is a primary indicator for when we’re due for a correction.

THAT said, if we are in for another correction, banks will be looking to the FHA for bail-outs when defaulting mortgages increase as people can no longer pay their high mortgage payments (if they were even credit-worthy to begin with), and the FHA relies primarily upon the fees it collects from borrowers to bail them out. If there’s no money left, well then, one could assume another total obliteration of banking as we know it. But since no one learns from history, if the FHA runs out of money the most likely scenario is that we, the taxpayers, will bail out the big banks, literally giving them ZERO risk in making these bad loans. Hell, they should just start issuing sub-prime loans again, since none of this does anything for accountability anyway! In that case, since the facts and economic indicators apparently don’t matter, they should just go ahead and decrease the MIP and save everyone $400 a year.

All sarcasm aside, I have to say it’s an encouraging sign for the FHA to keep the rates stable until they complete an economic analysis (like any insurance company or prudent financial firm would) as to how much risk they’d be exposed to in the event of a mortgage collapse, make sure they have sufficient reserves, and THEN make the adjustment.

Or they could just get rid of it altogether, since it won’t matter and the US Treasury will just print more money and bail out the banks anyway!
: – P

End of rant, and thanks for reading. And remember, confirm the accuracy of where you’re getting your “facts.” Note: if it’s the media or a National Association, or anything else poised to make a profit from swaying opinion one way or another, better check multiple sources!

About AARE Group

We are a real estate acquisition, sales and management company dedicated to helping homeowners solve problems and seeing hidden value while serving investors and leaving neighborhoods better than we found them, since 2005. We do this by buying, selling, and managing single-family and multi-family homes — 150 redevelopment deals and over 50 rental units in New England, Pennsylvania and Florida.